Question

Many Ghanaians anxiously, were waiting for the Ghana’s Monetary Policy Committee (MPC) to announce a new Prime rate base on the current economic situation. Last Wednesday, the MPC at a press conference said they have decided to maintain the Prime rate of 18% for the rest of the year. Explain how such an action is expected to affect money supply in the country, holding everything constant?

Answer 1

Answer - Till now the prime rate in Ghana was 14.5 % , after the drop of 1.5 % from 16 %. This drop was implemented in the economy in order to boost the borrowing process at cheaper rates and reduce the effects of the Economic lockdown. But the rate increase to 18 % will mean that now the borrowing will become more expensive for the banks as well as general public. Banks will have the lesser money to lend due to high borrowing rate. This decrease borrowing will lead to the decrease in the money supply in the economy and will reduce the consumption and investment. In other words the increased prime rate may harm the economy.